What is the Debt Service Coverage Ratio used for?

The Debt Service Coverage Ratio (DSCR) is a critical financial metric used to assess a borrower's ability to manage their debt obligations. It specifically measures the amount of cash flow available to pay current debt obligations, essentially indicating the financial health of the borrower. A higher DSCR means that the borrower has sufficient cash flow to cover their debt payments, which in turn reflects a lower risk for lenders. This ratio is particularly important in the context of real estate and lending, as it helps lenders evaluate whether the income generated by a property is sufficient to cover its debt obligations.

In contrast, determining total property value relates more to appraisals and market evaluations than to cash flow or debt servicing. Assessing the impact of interest rates on loan payments connects to loan cost calculations, not to the direct measurement of cash flow and debt obligations. Predicting future income for the borrower is not the primary function of the DSCR, as it focuses instead on current cash flows and existing obligations.